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The role of workfare in striking a balance between incentives and insurance in the labour market

  • Torben M. Andersen
  • Michael Svarer

    ()

    (School of Economics and Management, University of Aarhus, Denmark)

Workfare policies are often introduced in labour market policies to improve the trade-off between incentives and insurance as an alternative to benefit reductions. Most of the debate on such policies has focussed on the direct effect of those participating in the scheme, and in particular the possible locking-in effect reducing job search. In a general equilibrium search framework, we show that the effects of workfare policies critically depend on the response of those not in the programme when they take into account that workfare is a condition for remaining eligible for unemployment benefits. This implies that unemployed not yet in workfare may search more for regular jobs, and employed may accept lower wages since the outside option becomes less attractive. Introduction of workfare policies into an unemployment insurance scheme is shown to contribute to a reduction in both open and total unemployment. It is also shown that the direct search effects of workfare policies are a poor indicator of the overall effect workfare policies have on labour market policies.

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Paper provided by School of Economics and Management, University of Aarhus in its series Economics Working Papers with number 2008-05.

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Length: 33
Date of creation: 31 Mar 2008
Date of revision:
Handle: RePEc:aah:aarhec:2008-05
Contact details of provider: Web page: http://www.econ.au.dk/afn/

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  1. Fredriksson, Peter & Holmlund, Bertil, 2003. "Optimal Unemployment Insurance Design:Time Limits, Monitoring, or Workfare?," Working Paper Series 2003:17, Uppsala University, Department of Economics.
  2. James Albrecht & Susan Vroman, 2001. "Equilibrium Search with Time-Varying Unemployment Benefits," CESifo Working Paper Series 487, CESifo Group Munich.
  3. Chambers, Robert G., 1989. "Workfare or welfare?," Journal of Public Economics, Elsevier, vol. 40(1), pages 79-97, October.
  4. Nicola Pavoni & G. L. Violante, 2007. "Optimal Welfare-to-Work Programs," Review of Economic Studies, Oxford University Press, vol. 74(1), pages 283-318.
  5. Torben M. Andersen & Michael Svarer, 2007. "Flexicurity – labour market performance in Denmark," Economics Working Papers 2007-09, School of Economics and Management, University of Aarhus.
  6. Claus Thustrup Kreiner & Torben Tranæs, 2003. "Optimal Workfare with Voluntary and Involuntary Unemployment," EPRU Working Paper Series 03-15, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics, revised Aug 2004.
  7. Brett, Craig, 1998. "Who Should Be on Workfare? The Use of Work Requirements as Part of an Optimal Tax Mix," Oxford Economic Papers, Oxford University Press, vol. 50(4), pages 607-22, October.
  8. Christian Holzner & Volker Meier & Martin Werding, 2006. "Workfare, Monitoring, and Efficiency Wages," CESifo Working Paper Series 1749, CESifo Group Munich.
  9. Besley, Timothy & Coate, Stephen, 1992. "Workfare versus Welfare Incentive Arguments for Work Requirements in Poverty-Alleviation Programs," American Economic Review, American Economic Association, vol. 82(1), pages 249-61, March.
  10. Besley, Timothy & Coate, Stephen, 1995. "The Design of Income Maintenance Programmes," Review of Economic Studies, Wiley Blackwell, vol. 62(2), pages 187-221, April.
  11. Kolm, Ann-Sofie & Tonin, Mirco, 2006. "In-Work Benefits in Search Equilibrium," Research Papers in Economics 2006:12, Stockholm University, Department of Economics.
  12. Katherine Cuff, 2000. "Optimality of workfare with heterogeneous preferences," Canadian Journal of Economics, Canadian Economics Association, vol. 33(1), pages 149-174, February.
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